The T Report: Black Swan Thursday
I just can’t talk about QE anymore. In a few hours we will know what we get and I don’t think anything is going to happen between now and then to change my view. My base case remains that the Fed delivers an incredibly dovish statement and may even introduce some “targeting” but will not have a big full balance sheet expansion at this stage.
I think large QE is reasonably built in, so the risk/reward remains biased to the downside, which is why it may be time to think about a few things that may hit the markets.
Risks to Europe
This summer basically proved you cannot have a “black swan” event when everyone is expecting a “black swan” event. The expectations were so low, and the market positioned so bearishly, that almost any action could spark a massive rally. We got that “almost any action” and the vicious short covering rally (I prefer re-coupling rally) began.
Now the market seems almost too complacent. Delays of implementation have been the kiss of death for past European market rebounds and here we are in the middle of delays. Spain should ask for the money while it is still available. The ECB may waiver. Other countries may challenge the ESM. We don’t know what the situation will look like in a month or two. I am pretty sure that once the ECB starts buying bonds the program will grow large enough that Europe will continue to buy more bonds rather than take losses on existing purchases. The slippery slope will do all the work, but Europe needs to get on that slippery slope.
Europe is the Charlie Sheen of economies and policies. It was great for awhile, had a very public meltdown, and has now returned. What we don’t know, is whether the return is for real or just a blip before the next collapse. I think it is for real, but collapse is worth looking at.
Geopolitical Tensions
We had the tragic death of the U.S. ambassador in Libya yesterday. It is awful and there is no excuse for it, but it doesn’t mean we shouldn’t expect more of this activity. Watching the Democratic convention last week (or at least the Daily Show highlights), I was somewhat shocked by the number of times the speakers celebrated killing Bin Laden. As surely as that is meant to stir positive emotions here, that is likely to ignite hostility elsewhere. Whether the U.S. ran the “no fly zone” or not in Libya doesn’t matter, the perception is that the U.S. was a driving force, and that too has made enemies.
If the tensions or potential problems were only against the U.S. it might be containable, but across the Middle East there is turmoil within countries (Syria) and relationships between Iran and Israel seem to be deteriorating. I think I read somewhere that Obama declined to meet with Netanyahu. It says something about how far down the list of concerns the Middle East is when this doesn’t garner much attention. I’m not sure what it means, but I’m pretty sure it isn’t a sign that things are calming down there.
One thing that has always struck me particularly weird about American politics is gap between the elections and the swearing in of the winners. If we see big upheavals in congress or a Romney victory, that gap could be seen as an opportunity to exploit the lame duck government.
Again, I’m not particularly worried and don’t think anything major comes out of this, but that is exactly what a black swan is.
Apple
So they launched iPhone 5, they must already be developing iPhone 6 and some group is already working on iPhone 7 designs. Apple has to churn out compelling product after compelling product. That is hard to do. Many have failed to maintain top market spots. Just in the phone industry, Nokia, Motorola, and Research in Motion come to mind. The laptop industry has just as big of a track record of dominant companies failing.
Apple may not do as badly as some of the others, but I have more trouble believing the infinite growth by the day.
The new iPhone is bigger. The new iPad will be smaller. Will they continue that until the phones are too big to go in a pocket and the tablets are too small to be of use, so they can then make smaller phones and bigger tablets?
I like technology, but much of the improvement is above a noticeable difference for me on most things I use the phones for. When my current phone no longer does what I need, or more likely, lose it in a cab, I will get a new phone. Until then, its good enough.
All throughout their presentation yesterday I kept thinking of stereo equipment. It reminded me of salespeople droning on and on about the sound quality and reproduction capability of different pieces of equipment. Audiophiles will pay a lot for the best equipment possible. Personally, my ear isn’t that good, I think I can tell the difference between $200 speakers and $500 speakers, but much above that the improvement was beyond my ability to detect or noticeably enjoy.
For me, the phones satisfy my level of use. Sure, some others will need or want the new features immediately. Apple may be able to re-invent the TV experience, but they might not.
This wouldn’t matter that much if Apple wasn’t so dominant in U.S. stock market indices. Apple and the stocks that trade lock-step with it drive the entire market on many days. It is that level of importance to the overall market that gives Apple some “black swan” capability.
I may be wrong and Apple will break $700 this week. I can even see that case, and it wouldn’t shock me if eventually it did hit some of the higher targets. At the same time, it seems like a stock heavily owned by hedge funds and in this environment of limited liquidity, the downside could be more than it deserves if, for whatever reason, funds decide to exit.
Again, I don’t think a big sell-off is likely, but if there is any single stock that could cause the entire market to fade, this is the one.
China
Even with stimulus, the falling Chinese economy may continue to fall. The U.S. spent most of 2007 and 2008 propping up the markets. In the fall of 2008, the entire government was focused on propping up the markets, yet the economy and markets continued to decline into Q2 2009. While I believe China will act to stimulate, I’m far less certain about its effectiveness. The U.S. showed that you can have some pretty ugly economic data in spite of stimulus and that markets can decline even while money is being thrown at it, so the way we ignore what is happening in China and to Chinese stocks seems too complacent.
Fed, Fiscal Cliff, Inflation, Gridlock
This is a kitchen sink for the ability of U.S. policymakers to screw it up. There are so many ways they could mess the system up that it is almost amazing how docile we are. Virtually no one seems to think the Fed can cause inflation here. Almost everyone is convinced the Fiscal Cliff will be kicked down the road. Nothing about our divisive politics and money-printing Fed give me comfort, and I do think they will avoid doing anything that leads to disaster, but….
QE
Anyways, just some things to think about since after today we may briefly be able to think about things other than central bank intervention. I will send out my immediate reaction to the Fed when they release the info.